Capital Gains and Games

Where's The Obama 2011 Budget?

Stan Collender — Tue, 09 Feb 2010 12:32:16 +0000

My column from this morning's Roll Call tells you everything you need to know about what the Obama 2011 budget, which was released just eight days ago, seems to have disappeared from view.

Do You Know Where the Obama 2011 Budget Is?

Feb. 9, 2010

Why isn’t the Obama fiscal 2011 budget that was released just eight days ago dominating the political conversation inside and outside the Beltway? Better question: Why is almost no one talking about it?

It’s not because, as some tried to claim on the day that it was released, the president’s budget is just a repeat of what was proposed last year. While there’s no doubt that some proposals were included in the fiscal 2010 request, that’s to be expected when an ever-smaller part of the budget is discretionary and that’s where the White House focuses its attention. Besides, the proposed three-year freeze on a portion of domestic spending is new, and the plan to let some tax cuts expire and extend others at the end of 2010 is now imminent as opposed to just envisioned. In most years, a proposed spending limit, tax cut and tax increase would all be major controversies that would be political topic A.

But they’re not.

Part of the reason that the Obama budget seems to have disappeared from view is that the White House clearly doesn’t want to talk about it. In fact, the rollout of this year’s budget was comparatively limited. The Obama administration barely did one of the things that many previous administrations have done to dominate the news in the days before the budget was released: leak the details to generate positive stories. Another frequently used tactic — having key economic policy team members interviewed on the Sunday talk shows around the release of the budget so that the debate is on your terms — also didn’t happen this year. Other than the day the budget was released, Office of Management and Budget Director Peter Orszag mostly kept his head down.

Even the president’s radio address Saturday wasn’t about the budget — it was about his small-businesses proposals.

This is a continuation of a trend that started more than a decade ago, when the arrival of the president’s budget changed from being a hugely positive to a mostly negative political event for the White House. As deficits have mushroomed, as the value of a stimulative fiscal policy in an economic downturn when monetary policy choices are limited has gone largely unexplained and unappreciated, and when every option to reduce the deficit is at least as politically difficult as the deficit itself, it’s not hard to understand why this or any administration wants to limit the discussion of its budget. Being a one-day story that disappears quickly is the preferred strategy these days.

But it’s not all about what the White House wants. As I first discussed in the Jan. 19 Fiscal Fitness (“They Just Don’t Make Presidential Budgets Like They Used To”), media coverage has changed a great deal over the past decade in a number of ways that significantly limits the discussion. This includes far less in-depth reporting, fewer column inches and airtime devoted to stories that used to get multiple pages and lengthy special reports, and a growing tendency of the print media to do features because, even for daily papers, the hard news is already known by the time the publications hit the streets.

Add to this the fact that the Obama administration did a good job limiting the coverage by not having its economic team talk that much about the budget after it was released. Few administration interviews meant that there also were fewer opportunities for those opposed to the White House’s plans to respond. This limited the personality- and partisan-driven controversies that create news and, therefore, the follow-up stories that in the past typically have provided the fuel for the discussion after the budget was released.

Finally, the president’s budget has been less of a topic of conversation because the real story is about what, if anything, Congress will do rather than what the White House has proposed. After the budget was released, the focus almost immediately shifted to how the House and Senate would react. House Budget ranking member Paul Ryan’s (R-Wis.) budget proposal, with its large Medicare cuts that even the GOP leadership wouldn’t support without qualifications, also took attention away from the Obama plan. The talk inside the Beltway quickly shifted to whether there would or could be a budget resolution this year, whether reconciliation would be used for a variety of things, whether individual appropriations were possible or a continuing resolution was likely, etc. The discussion may have been prompted by the numbers and proposals in the Obama budget, but the budget itself wasn’t the focus.

The Obama budget will make a comeback later this year when Congress considers the 2011 budget resolution and there are comparisons between what the president proposed to what is considered. If the budget resolution is very different from what the White House proposed, Republicans likely will consider offering the Obama budget as an alternative just so that Democrats are forced to vote against it. (The Ryan plan will be treated similarly, but that’s a story for another day.) In the meantime, the Obama 2011 budget will likely continue to fade from view.

Why Raise the Cigarette Tax When You Can Just Tax Breathing?

Andrew Samwick — Tue, 09 Feb 2010 00:46:44 +0000

So goes the logic (with only mild exaggeration) of one of the most ridiculous policy proposals I've read in a while -- to make up for falling gas tax revenues with a new tax on miles driven. Ashley Halsey III is on the case in The Washington Post yesterday.

The appropriate tax instrument to make up for declining or inadequate gas tax revenues is ... a higher gas tax rate. Compared to a higher gas tax rate, a tax on miles driven ignores the amount of fuel used to drive those miles. Highway travel is taxed the same as city travel. Gas guzzlers are taxed the same as hybrids. Neither change makes any sense from an environmental perspective. Nor is it necessary to raise issues of privacy involved in collecting a tax on miles driven in the ways suggested in the article by monitoring the history of the locations of the car (as opposed to an annual fee based on an odometer reading collected at a state inspection).

Many cities are experimenting with congestion taxes, which are based on miles driven at particular times in particular locations. Those are worthwhile policy measures to relieve congestion and are different from a uniform tax on miles driven.

Financial Crisis Was Rooted In The Corporate Income Tax Interest Deduction

Pete Davis — Mon, 08 Feb 2010 16:25:51 +0000

Washington invariably prefers the quick fix and ignores the underlying causes of whatever problem it faces. What better example than the financial crisis? At its most fundamental level, we underpriced the risk of mortgages and other financial assets. Why? President Obama and Congress have focused on the moral hazard of "too big to fail" financial institutions driven by bonus crazy CEOs making bets backed by government insurance. There's plenty of truth in that, but the deeper cause was easy money. A month ago, I defended Ben Bernanke's refutation of charges that the Fed's 2004 to 2006 easy money policy was to blame. So if, Fed monetary policy wasn't too easy, what was wrong? The corporate income tax deduction for interest produced a -6.4% tax rate on debt financed investments, while the double taxation of equity income (dividends and capital gains) produced a 36.1% tax on equity financed investments according to this 2005 Congressional Budget Office study. See Table 1. That negative tax rate is the root of the fiscal crisis. Taxpayers paid a large subsidy for Wall Street investors to take those risks.

Marty Sullivan of Tax Notes (a former Joint Committee on Taxation economist) laid out the evidence very well on September 28, 2008. He showed how huge tax subsidies for mortgage interest and corporate interest expense fueled the Wall Street conflagration of 2007 and since. He also cites the warnings of the Joint Committee and Treasury of twenty years earlier. What politician is going to raise taxes on homeowners and on big financial institutions when times were good to avoid a financial crisis two decades later? No way! President Bush's 2005 Advisory Panel on Federal Tax Reform made the same point, but it's recommendations were ignored too.

On April 15, 2008, Brookings scholar Jason Furman (now Deputy Director of President Obama's National Economic Council) made the same point before the Senate Finance Committee at the bottom of page 8 of his testimony. This New Yorker piece presents a well-written summary. Former Congressional Budget Office Director and McCain economic adviser Doug Holtz-Eakin made the same point on p.375 of this Tax Notes volume on October 23, 2006.

Yesterday, on NBC/s Meet the Press, former Treasury Secretary Hank Paulson called for tax reform to address "borrow[ing] too much" along with "too big to fail" regulatory reform, another recognition that our Tax Code is at the root of the financial crisis.

The hard part of tax reform is that you have to raise taxes on those getting the subsidies. There are far fewer of them than the many taxpayers who stand to get slightly lower tax rates, so Wall Street corporations will finance the lobbying to kill tax reform before it has to chance to prevent the next financial crisis. We'll end up with watered down quick fixes at best, and the roots of the next financial crisis will remain in the Tax Code.

Is BBCT the New VAT?

Bruce Bartlett — Mon, 08 Feb 2010 15:11:52 +0000

Anyone who reads the Wall Street Journal's editorial page knows that it hates the value-added tax. I don't mean hate the way it hates liberals, government regulators and the capital gains tax. No, the Journal hates the VAT more deeply and strenuously than anything else.

The reason is that the Journal sees the VAT as the essential fuel of the welfare state. Without it a European-style welfare state cannot exist. Therefore, if you hate the welfare state--as the Journal does--you must oppose the VAT with every fiber of your being. No fooling around; the VAT means Armageddon, the end of America as we know it and victory for welfare state liberalism. If we impose a VAT we will all soon be cheese-eating surrender monkeys just like the French.

The problem with the Journal's hatred of the VAT is that it also embraces consumption-based taxation. Under a pure consumption tax there would essentially be no taxes on the returns to capital--no taxes on interest, dividends or capital gains. Such would be the Journal's Nirvana, the perfect tax system (insofar as we have to have taxes at least to pay for a really big Defense Department to protect all the wealth that would quickly be accumulated under this perfect tax system).

Hence, the Journal has long championed the flat tax originally developed by Hoover Institution scholars Robert Hall and Alvin Rabushka, who first put forward their plan in a Journal op-ed. The Hall-Rabushka plan is a pure consumption tax with a single rate that is levied equally on businesses and individuals.

Economists have long recognized that while the single or flat rate is the most obvious fact about the plan, it's not the most important. Imagine a flat rate on our current tax base. It would probably increase growth a bit, but not very much because the greatest economic distortions in our tax system relate to the tax base. Substituting any sort of coherent base, whether a consumption base or a comprehensive income (i.e., Haig-Simons) base would unquestionably improve economic performance much more. Even allowing for progressive rates on a consumption base would be far preferable to what we have now.

The problem is that there are really only two ways of taxing consumption broadly: the VAT or a retail sales tax. Every country with a national consumption tax has a VAT, none use a retail sales tax such as we have at the state level. The reason is that the tax collection system is too fragile to allow retail sales tax rates much above 10%. The VAT works well at rates at least twice as high because it is self-enforcing to a large extent--tax payments have to be reported by businesses to collect credits on taxes paid on inputs.

For this reason, the so-called FairTax that many unsophisticated tax reformers favor will not work. I know of no serious tax analyst who thinks it is possible to collect all federal taxes including the payroll tax using this system. Of course, it's politically impossible anyway and therefore not worth wasting one's time with. (The proponents are also crackpots who grossly misstate how their plan really works. See here for analysis.)

Consequently, the only consumption based tax system worth serious consideration is a VAT. Indeed, the Hall-Rabushka plan is a VAT. It is what is known as a subtraction-method VAT similar to the one in Japan. The other type of VAT is the credit-invoice method, which is widely used in Europe. They are mathematically identical.

So we come to the crux of the Journal's dilemma. It wants a consumption-based tax system, but it hates the only type of consumption tax that would actually work.

As long as the Journal could confine the debate to tax reform, replacing the current system in a revenue-neutral manner, it could fudge the contradiction in its philosophy. The problem now is that the Journal also hates budget deficits and they are now much too large to realistically suggest that they be eliminated solely by spending cuts, even if the nitwit tea party crowd thinks so.

The Journal knows that revenues have to rise if we are to make a serious dent in projected budget deficits. It hasn't yet said so in so many words, but it is finally allowing one of its most trusted op-ed writers to suggest the idea in a roundabout way. Thus this morning it allowed Glenn Hubbard, former chairman of the Council of Economic Advisers under George W. Bush, to say this:

If the administration wants to maintain the spending path on which its budget blueprint places us, it must confront and propose significant, broad-based tax increases. Let's be clear what this means.

Our present income tax already relies very heavily on revenue from high earners; the top 1% pay well over one-third of federal income taxes. Mr. Obama's budget increases the reliance. But we cannot count "taxes on the rich" for deficit reduction, health-care expansion and funding entitlements while ignoring the effect of those tax increases on investment, innovation and growth.

To raise the revenue for the president's welfare-state ambitions, the tax increases must necessarily be broad-based, as, for example, with a broad-based consumption tax. A useful start would be to calculate—and present to the public each year—the broad-based consumption tax required to pay for higher spending.

To appreciate the importance of this statement one must read between the lines. Of course, the blame for any large tax increase must be placed squarely on Barack Obama's policies even though half of projected deficits result from Bush's policies. Nevertheless, it is the very first sign of realism with regard to higher revenues that I can recall reading on the Journal's editorial page, ever. Up until now its position has been that the only permissible tax increase is that resulting from a further cut in the capital gains tax, which would lead to a flood of new revenues according to Journal dogma.

Moreover, the Journal seems to finally be dipping its toe into the VAT pool. Of course, it can't reverse decades of opposition overnight, so it will have to be called a broad-based consumption tax or BBCT. But as I have noted, the only viable BBCT is a VAT.

It will be interesting to see whether the Journal allows other dissenting views to its heretofore unrelenting opposition to tax increases of any kind and a VAT in particular. It may end up having to take it all back and disown its own blasphemy. Nevertheless, it is a start, the beginning of fiscal sanity in a place where little has been seen since the death of Bob Bartley.

Addendum

Fortune also suggests the need for a VAT today. Chait comments on the same Hubbard article here.

Check Out This Very Cool Budget Table From The NY Times

Stan Collender — Mon, 08 Feb 2010 14:08:46 +0000

I can't believe I didn't focus on this before.

A week ago, Shan Carter and Amanda Cox at the New York Times published this very cool, fun, interesting, and interactive chart that shows the different components of the federal budget in a way that analysts, geeks, observers, and commenters up to now have only dreamed about. It puts to shame the static pie chart that has been used in the budget itself for decades.

What's most impressive and useful is the way the chart displays a great deal of information both visually and with text that provides the actual numbers. Also, check out the buttons at the top left of the chart. In particular, click on "Hide Mandatory Spending," and be amazed at how simply and easily it tells you all you really need to know about the federal budget debate.

The only thing missing is a similar chart for revenues. Shan and Amanda?

I was so impressed with this chart that I asked my into-computers contacts how it was done so that we here at CG&G could do some ourselves. For those who are interested, it was done using Flash, which clearly is a great way to display government data interactively.

Note to the White House, CBO, and House and Senate Budget Committees: Get on this bandwagon and make life better for all of us.

Question Time In The U.S. Not Likely

Stan Collender — Sat, 06 Feb 2010 22:47:43 +0000

Bruce raises a number of interesting points in his post on whether having a regular question time of the president by Congress similar to the questions asked of the prime minister by the House of Commons in the U.K. would be a good idea. And you have to love Bruce's idea of having the president also be able to ask questions of members of Congress.

But in spite of all of the enthusiasm for the idea that became evident immediately after the president did more than hold his own at a televised Q&A session at the GOP retreat last week, including a bipartisan group of journalists and others publicly requesting that the practice occur regularly, it's a safe bet that it's not going to happen, or at least not happen any time soon.

The reason: The GOP made a huge communications mistake when it allowed the Q&A session with the president to be televised and isn't likely to repeat it any time soon.

In fact, there were two mistakes, both of which were right out of a Communications For Dummies text.

First, news occurs when there is a controversy of some kind and the Q&A session displayed controversies galore with the president clearly in command.

Second, the GOP gave the president a forum he wouldn't have had if the session had not been televised.

Think of what would have occurred had the session not been televised or covered by other journalists. After the meeting, GOP leaders would have held a press conference at which they would have characterized the president's remarks rather than having the media do it. More important, they mostly would have used that very well-attended press conference to deliver their own messages about the substantial differences Republicans have with the president's policies, how disappointed they were in his continued refusal to work with them, etc).

Instead, Republicans ended up taking backseat at their own retreat. The stories were about what Obama said; the president's detailed knowledge of the issues and the GOP's positions; and how the president walked into the lions' den, took the discussion right to the Republicans, and pointed out the GOP's inconsistencies.

And in today's world of social media, individual Republican members of Congress at the retreat would have been tweeting their own characterizations of what the president said and being a primary source of information about the event while he was still responding to their questions. By the time the president talked to reporters, the news would have already been out and it would have been about the GOP's reactions.

As Bruce said, it is standard strategy for underdogs to demand to debate with, in Bruce's words, "the leader" because they typically are "elevated" in the process. That is, after all, what happened in Obama's first debate with John McCain: They seemed at least equally as presidential when they appeared on the stage together and almost all questions about whether Obama was equal to the job instantly disappeared.

Question time would be different, however. The president will be the only one at the podium with the presidential seal in front as he looks into the camera and responds By contrast, the questioners will be seated in a group facing him. There's simply no way for the GOP to look as strong and leader-like in that situation.

Because of all this, my guess is that the White House will be far more interested in question time than the Republicans. The Republican leadership will be the one that shoots it down.

Tax Cut Era Is Over Dave Stockman Just Said

Pete Davis — Sat, 06 Feb 2010 00:00:37 +0000

I could hardly believe my ears just now, watching former Reagan OMB Director Dave Stockman pronounce the end of the tax cut era on the PBS Newshour.

Stockman started by lambasting Wall Street gunslingers, of which he was one, for wrecking the financial system. Then he cited the AIG bailout as the worst policy mistake of our era. Then he said the deficits will have to be addressed, that the Reagan tax cuts failed to restrain government spending, and that we'll be forced to raise taxes from now on. That's an amazing turnaround from one of the original supply side torch bearers.

I formulated the Roth-Kemp tax cuts in early 1977 and couldn't conceive of their enactment. Four years later, I stood on the Senate floor in disbelief as they passed, wondering how long the red ink would last. The answer was 17 years. I saw plenty of wasteful spending along the way too. My Senate Budget Committee experience taught me that genuine deficit reduction is slow, tough work, which only succeeds when every tax loophole and wasteful spending project is attacked relentlessly, year in and year out, for decades.

I'm very concerned about the weakness of our recovery this year when the stimulus bill wears off in the second half of the year and when the Fed starts shrinking its balance sheet, so I would favor additional stimulus right now, particularly to avoid state government layoffs, but starting in 2011, we're going to have to get serious about spending cuts and tax increases -- just like Dave Stockman just said. Watch the video here.

Bruce...Here's Really Why The Obama FY11 Budget Might Seem Like It Was DOA

Stan Collender — Fri, 05 Feb 2010 20:55:20 +0000

Actually, I don't really disagree with Bruce on this. But there are a few things that distinguish the Obama fiscal 2011 budget from all of the other presidential budgets that, as Bruce pointed out in his excellent history, have been quickly forgotten over the years.

First, as I noted several weeks ago, news coverage of the president's budget has changed completely from the days when the major national papers swarmed over the story and assigned ten or more reporters to cover what was proposed. Today, the "news hole," that is, the amount of space/minutes actually devoted to actual news in the paper and on television, is far less and, other than disasters and crises, few stories get as much coverage as they used to. This is specially true of a story like the budget, where, other than the by now routine picture of the books being delivered to the Hill or the Government Printing Office (see below), there are few interesting visuals (For the record, if you think tables and charts are exciting you are not the target audience for most newspapers and television news programs).

In other words, almost regardless of what's in the budget, there's less coverage now than has ever been the case. Although you can argue that there's less coverage because there's less of a story, there's also less of a story because there's less coverage.

Second, to the extent that there's a budget story this year, it's much more about what Congress will do rather than what the president proposed. All substantive proposals took, and are still taking, a backseat to that. That's what editors want and that's what they're getting. The most interesting thing is not what the president proposed; it's what, if anything, will come of it.

Third, there's little doubt that the White House didn't roll out the FY11 budget with as much flair as it did last year or, more importantly, as many other presidents have done in the past. As I noted less than a week ago, the usual leaks from the White House were not leaked this year and that reduced what used to be several days of coverage before the budget was released to virtually nothing. In addition, what previous administrations typically did-- a cavalcade of it's economic stars doing interview after interview before and after the budget was released -- did not happen this year.

Fourth, the submission of the budget is no longer the great positive it used to be for the White House. Given the fiscal situation every president now faces, especially the fact that you're criticized if you don't propose to reduce the deficit and every deficit reduction option creates severe political problems, the requirement to submit a budget every year has become a huge problem rather than an opportunity. It's no wonder, therefore, that presidents may not want to hype their proposals as much as has been the case in the past.

So, in spite of what economistmom Diane Lim Rogers said several weeks ago when she took issue with me when I said that the president's budget just wasn't as valuable now as it used to be (Diane said it still was "...a hugely important agenda or at least 'vision' for fiscal policy going forward"), it's hard not to conclude that the days when the president's budget -- Obama's or anyone else's -- being the story are gone for a long while.

Question Time?

Bruce Bartlett — Fri, 05 Feb 2010 15:07:30 +0000

After President Obama visited their conference last week and took questions from them, Republicans have become very keen on institutionalizing the event the way it is in Britain, where the prime minister routinely takes questions from the opposition in Parliament.

It appears to me that Republicans are simply looking to save face from having believed their own propaganda about Obama's inability to speak without a teleprompter. Also, it's standard debating technique for underdogs to be elevated by being granted a debate with the leader. The debate makes both appear equal and the challenger has less to lose than the leader.

Nevertheless, I think Republicans are being short-sighted in their demands. Would they really have wanted the grossly inarticulate George W. Bush to have had to take questions regularly from Democrats in Congress? I think not.

Moreover, the dismal quality of presidential news conferences does not lead me to think that much useful information will be gleaned from question time with members of Congress. They will just ask "gotcha" questions or about obscure issues that are only of interest to them. Anyway, Congress already has hearings with administration officials more knowledgeable about the issues.

For these reasons, I am disinclined to think that a formal question time is any value in our system of government. However, I might be willing to support the idea if the president is allowed to ask members of Congress to answer questions from him. Once they are at risk of looking foolish I think their enthusiasm for question time will vanish rather quickly.

Why Obama's Budget Was DOA This Week

Bruce Bartlett — Fri, 05 Feb 2010 14:09:07 +0000

In my Forbes column I look at why Obama’s budget was DOA this week (and why all presidential budgets have been for a long time and will continue to be).

On Feb. 1 President Obama sent his budget for fiscal year 2011 to Capitol Hill, where it promptly disappeared after a brief flurry of news reports. Republicans are keen to claim that the virtual disappearance of the president's budget from view signals a dissatisfaction with his priorities. In fact, it is simply part of a long-term trend that has been going on for many years.

It may surprise people to learn that throughout most of American history there was no budget at all, at least not in the sense that we use the term today. Up until the Civil War Congress handled all the budgeting. Monies were appropriated to the executive branch for various purposes and it had the responsibility of spending them. At the end of the year the various agencies totaled their spending and someone on Capitol Hill added it up. That was the budget.

Remarkably, this system worked for a long time. In fact, the federal government ran surpluses most of the time. Deficits primarily resulted from wars, and strenuous efforts were always made to pay them off as soon as possible afterward. On those occasions when the Treasury needed to sell bonds, each individual bond issue had to be specifically authorized by Congress.

Before the Civil War virtually all taxing and spending decisions were handled by the Ways and Means Committee in the House of Representatives and the Finance Committee in the Senate. But the huge expansion of spending during the war required some division of labor. Committees on appropriations were established in both houses. Eventually other committees were established as well to provide oversight of federal spending.

The president remained a relatively passive participant in the budget process. Federal agencies normally submitted their budgets directly to the relevant congressional committee. But as federal spending continued to rise, especially during World War I, it was felt that this ad hoc system needed modernization. The war also led Congress to give the Treasury authority to sell bonds and set their terms on its own, subject only to an overall limit.

The Budget and Accounting Act of 1921 created a Bureau of the Budget in the executive branch to coordinate budget submissions by various departments and agencies. The same legislation also created the U.S. General Accounting Office as part of the Legislative Branch in order to audit federal books and prevent fraud. A few years later the Joint Committee on Taxation was established in order to advise both the Finance Committee and Ways and Means Committee, owing to the increasing complexity of the tax law after institution of the federal income tax in 1913.

The Budget Bureau was originally part of the Treasury Department, but it moved over to the White House in 1939. In 1970 it was renamed the Office of Management and Budget (OMB) to indicate a broader responsibility for managing the federal government as well as preparing the budget.

An important change occurred in 1974. Richard Nixon was desperately trying to cut federal spending to help keep rising inflation in check. In doing so he made extensive use of something called impoundment, which basically acted like a line item veto. If the president didn't want to spend money for something appropriated by Congress, he just didn't.

Congress, which was heavily dominated by Democrats, was furious with Nixon, believing that withholding appropriated funds was unconstitutional. To resolve the issue and reinstate congressional primacy on budgetary measures, Democrats drafted an impoundment control bill, which would make it unmistakably clear that the president was required to spend every dollar appropriated by Congress exactly for its stated purpose. The president could ask Congress to rescind budget authority for projects he deemed to be unnecessary or wasteful, but Congress was not required to vote on rescissions and most requests were simply ignored.

Although the Democrats had the votes to restrict impoundment, they were eager to have bipartisan support for their efforts because Nixon was expected to veto the legislation and Republican votes would be needed to override. Republican leaders believed that a big reason for the budget deficit was that Congress dealt with the budget piecemeal--spending was considered separately from revenues and each spending bill was considered in isolation from the rest of the budget.

Republicans and many budget experts as well thought that if there was a point in the legislative process where Congress had to consider the budget in its totality then it would be easier to get it under control. The bipartisan Congressional Budget and Impoundment Control Act of 1974 created a new budget process in which budget totals are debated and capped in a budget resolution that is supposed to be enacted before the appropriations committees begin their work for the year.

The Budget Act made some other important changes as well. Historically, the government's new fiscal year began on July 1. But with the necessity of passing a budget resolution before the beginning of the appropriations process it was decided that more time was needed and the beginning of the fiscal year was moved to Oct. 1. Among other things, this left a transition quarter that was not part of any fiscal year, which continues to confound budget analysts to this day.

It also became clear that if the new congressional budget process was to work then Congress needed its own budget estimates. Historically, Congress had gotten estimates for the cost of new programs from OMB, which gave the president enormous power through his monopoly on budget data. Thus, as part of the Budget Act, Congress created the Congressional Budget Office (CBO) to crunch its own numbers.

As it turned out, Republican votes weren't needed to pass the Budget Act. By the time it reached Nixon's desk he was weeks away from resigning over Watergate. Consequently, he was so weakened politically that Nixon decided against getting into a fight with Congress over impoundment and signed the bill even though he was signing away a lot of presidential power at the same time. Every president since has regretted Nixon's action.

The loss of impoundment authority has led to a proliferation of earmarks and congressional micromanagement of the budget. Partly as a result, Congress has found it increasingly difficult to finish its work on time each year. To prevent departments and agencies from shutting down, it enacts continuing resolutions allowing them to continue spending at the previous year's budgetary level.

Ironically, the portion of the budget over which Congress actually has meaningful control has fallen sharply over time. In 1970 the discretionary portion of the budget--those programs and operations subject to annual appropriations, was 61.5% of all spending. The rest consists of mandatory programs like Social Security, Medicare and interest on the debt that are not subject to annual appropriations. Their spending is automatic and cannot be reduced just by appropriating less money to them. In 2009 the discretionary portion of the budget was down to just 35.2% of spending.

Given all these changes in the budget process, the president's budget has been greatly diminished in importance. Whereas it was once the necessary starting point for all budget discussion, since that was the only place the numbers even existed, now it is just one proposal among many. Congress tends to rely exclusively on the CBO for all its budget numbers and analysis. Although departments and agencies are supposed to adhere to the president's priorities, they do so only half heartedly.

Nevertheless, the media still maintain the fiction that the president's budget is something meaningful. Journalists dutifully report that the president is slashing such and such program, freezing spending or giving the go ahead to some headline-catching initiative. But at the end of the day the final budget has little if anything to do with the president's priorities. Congress mostly decides how the money will be spent and lobbyists probably have more to say about it than OMB does.

But the big fact about the federal budget is that more and more of it is effectively on automatic pilot; neither Congress nor the president have anything so say about it. If you take all the earmarks, unnecessary weapons systems, waste, fraud and abuse and everything else you can think of that deserves to be cut, it still adds up to drops in the ocean compared to Social Security and Medicare. As long as those programs are off limits the president's budget will continue to decline as a matter of political and economic importance.